Are big banks abusing their market power?

Wayne Swan announced over the weekend that the wholesale funding guarantee put in place at the height of the financial crisis is no longer needed. The guarantee gave Australian banks access to overseas funds during the credit drought, but the way it was applied has inspired an abuse of market power by the big banks, according to some critics.

Transcript

KERRY O'BRIEN, PRESENTER: While the after tremors of the global credit crisis continue on financial markets and many of the biggest banks in the world are still not out of the woods, the Australian Government has decided this country's banks no longer need to be underwritten by a rare government funding guarantee put in place at the height of the crisis. Treasurer Wayne Swan has announced the wholesale funding guarantee for the banking sector will be withdrawn at the end of March, although the guarantee of deposits for less than $1 million will stay in place. The guarantee ensured Australian banks access to scarce wholesale funding overseas during the credit drought, but critics say the way it was applied has encouraged an abuse of market power by the big banks, who hold a huge advantage over smaller rivals that will not be easily rectified. Business editor Greg Hoy reports.

WAYNE SWAN, TREASURER (Yesterday): So today I'm announcing the closure of the Government's guarantee scheme, the large deposits and wholesale funding on 31st March, 2010.

MICHAEL PETERS, AUSTRALIAN SCHOOL OF BUSINESS: The distortion of the marketplace has to stop because the oligopolies are getting more entrenched. It's virtually wiped out the non-banking sector.

GREG HOY, REPORTER: It's an emotive debate about the future of Australian banking. Australia's biggest home loan lender, the Commonwealth Bank, or CBA, just posted its vision of the future on YouTube, suggesting getting a home loan will soon be as easy as touching a screen. But others have been making more dire predictions given recent consolidation of the banking sector during the global financial crisis.

MARK BOURIS, YELLOW BRICK ROAD: It's dangerous, because if nothing happens then the big four banks will control the market completely.

MARIA RIGONI, INSTITUTE OF PROFESSIONAL BROKERS: The cost to the consumer is that credit products will become more expensive.

GREG HOY: The four tall pillars of the Australian financial system have grown much taller. Though the four major banks' double A ratings did withstand the carnage of the credit crisis, this was due not only to sound management but stringent regulation and the government guarantee of both bank deposits and their borrowing of wholesale funds overseas, which saw almost $200 billion raised by banks. But for the funding guarantee, smaller or second tier lenders have had to pay more than double the fees to government, giving the big banks an enormous advantage.

DAVID LIDDY, CEO, BANK OF QUEENSLAND: Then on top of that guarantee fee, the investors and the international markets charge each of the banks according to their ratings. So there's quite a big difference in terms of our ability to price our products going forward competitively with the major banks, given that we're some 80 basis points, plus a further margin, behind the big banks in terms of accessing that funding.

GREG HOY: And this huge advantage to the four majors has changed the banking landscape, despite the Government investing $16 billion in mortgage-backed securities to try to boost the lending power of smaller lenders.

ANDREW INWOOD, BRAND MANAGEMENT: The CBA and Westpac are holding between them about 50 per cent market share. It's almost balanced, but it looks like that CBA's accelerating slightly faster. Another 25 per cent is divided up between ANZ and National Australia Bank, but the rest of the 25 per cent is held by the tier twos. Their share's diminishing though. Most of the money which CBA and Westpac are getting is coming directly from those tier two banks as they can't compete on the funding stakes.

GREG HOY: The changing fortunes of Australian lenders has been carefully tracked throughout the global financial crisis and since by Brand Management financial research.

ANDREW INWOOD: We're facing a system where we have two banks dominating the market to such an extent that they're now starting to reject deals which aren't perfect for them.

GREG HOY: Protest pressure has been building for months from regional banks and other second tier lenders like Mark Bouris, founder of the fledgling Yellow Brick Road finance and formerly Wizard Home Loans.

MARK BOURIS: It's quite parlous and dangerous. Consolidation means there's no competition basically and that means people who sit within the consolidated ring, the four big banks, can do what they want.

MARIA RIGONI: If the independent finance broker disappears from the market, right, the banks have got one less competitor.

GREG HOY: Independent mortgage brokers like Maria Rigoni say big banks have begun to make life increasingly difficult for those who shop around to find the best deal for each borrower.

MARIA RIGONI: Having an attitude of, "You want to deal with us, deal with it our way. We're not listening to you, you know. We are big enough to be able to command you to give us so many deals, because we have so much of the market."

GREG HOY: The Bankers' Association wouldn't comment on this, so the 7.30 Report wrote to each of the big four banks. Each denied they've been making life harder for brokers, though they say they are lifting standards, which is like waving a red rag at the bulls of broking. Meantime, the big banks insist they've also had no option but to increase interest rates above the Reserve Bank's official cash rate rises and through their association argue that in fact Australians should be happy with the level of rivalry in the banking sector as it exists today.

DAVID BELL, AUSTRALIAN BANKERS ASSOCIATION: If you look at the prices being offered, the competition in pricing, both at interest rate level and on fees and also the wide range of products available, I think you can make a very good argument that during one of the most difficult periods in our financial history, we have a very competitive banking system here in Australia.

MARK BOURIS: The Reserve Bank puts the interest rate up, probably what's going to happen is all four banks are going to do exactly the same thing. That's oligopoly behaviour. What used to happen before is organisations like mine would put pressure on them to reduce their margins.

GREG HOY: The big banks appear to have been bashing each other of late and it's been fun to watch. But a genuine stoush, or shadow-boxing to appease critics? NAB has been leading the fray, cutting some fees and containing rate rises to Reserve Bank increases.

LISA GRAY, NAB: To really provide much fairer banking to Australians and actually make it much more accessible to them, ensure that it's actually a lot fairer.

GREG HOY: But how long will it last?

LISA GRAY: It's a long-term strategic play for us about being more competitive, but also ensuring that NAB actually stands for something different.

MARIA RIGONI: While they're building their book to the level that they want it to, they'll be nice, they'll offer things. But when it gets to a point they don't want it anymore, they'll change their policy.

GREG HOY: So the drums have been beating louder and louder for Government to level the playing field between the big and small lenders.

MICHAEL PETERS: The reason why the Government has continued the guarantee is more or less a mystery from a public policy perspective.

GREG HOY: While the guarantee for bank deposits of less than $1 million will remain in place, yesterday's announcement of an end to the guarantee for funding by the end of March caught smaller banks by surprise. They are hoping the Government will reduce fees on funding that they've already locked in for years ahead.

DAVID LIDDY: I'd like to see the Government firstly equalise that guarantee fee between now and 31st March. So, bring all the banks back to 70 basis points, and then post 31 March, to have that guarantee fee flat at 70 basis points, the same as the major banks, ongoing.

GREG HOY: Otherwise, it seems, the Government's solution will be no quick fix, just as the big banks have begun a torrid competition for savings deposits which will now have a far greater influence on how Australian banks lend.

ANDREW INWOOD: Competition for savings in Australia right now is extraordinary and you're seeing a lot of very good offers being made. The big winners at the moment are both CBA and Westpac. They're offering good rates, they're promoting them hard and they're sucking in money really quickly.

GREG HOY: So what then does the future hold for Australian banking?

DAVID LIDDY: It's a case of big is beautiful, but not necessarily the right way to go. What I'm arguing is that to have a competitive landscape we need to have competition on an equal footing, and that's all I'm asking to do.

GREG HOY: Though he would like to have seen the government guarantee maintained for second tier lenders, Mark Bouris believes all is not lost, having struck a deal with one credit union as a means of offering competitive loans.

MARK BOURIS: Oligopolies always offer one good thing: an opportunity for someone else to come and discount. Interestingly enough, there are one or two of the banks who are starting to see that, so the fact that they're recognising this tells me that I'm on the right track.